Key Takeaways from the 2022 Summer IRS Security Summit
2022 IRS Security Summit The Internal Revenue Service and the Security Summit partners continue their efforts to remind tax preparers that identity thieves are increasingly targeting tax professionals. It is imperative that tax preparers take basic steps to protect themselves and their offices from data theft. It is not just individual identity thieves that are targeting tax professionals. Criminal syndicates are well funded, have the technical ability, but also use extensive tax knowledge in their attempts to trick or hack their way into a tax professional’s computer system. These syndicates and thieves are attempting to access tax clients’ data through tax professionals’ preparation software, and to steal the tax preparer’s information such as their EFIN and PTIN. This year, the 2022 summer IRS Security Summit Awareness campaign is focusing on reminders for tax preparers to concentrate on security fundamentals and to bring awareness of the emerging vulnerabilities that the IRS is seeing for those practitioners using cloud-based tax services. 5 Tips for Avoiding Tax Related Identity Theft The IRS Security Summit is emphasizing the following steps that tax professionals should do to help prevent identity thieves from stealing their clients’ data and their clients’ from becoming a victim of identity theft. Sign up clients for Identity Protection PINs (IP PIN) The IP PIN serves as a critical defense against identity thieves. Now that anyone can opt to get an IP PIN, tax preparers should inform their clients about the IRS Identity Theft Protection PIN Opt-In Program and encourage their clients to sign up for one. See IRS News Release I.R. 2022-140 (Identity Protection PINS provide an important defense against tax-related identity theft) for how individuals can sign up and the benefits for having an IP PIN. Email Spear Phishing Scams The Security Summit partners continue to see instances where tax preparers have been vulnerable to identity theft phishing emails that pose as potential clients. The identity thieves use these emails to trick the preparer into opening email links or attachments that allow them to infect their computer systems and potentially steal client information. The Security Summit also warns tax preparers using cloud-based systems to prepare and store tax returns to make sure that they are using multi-factor authentication that use options such as phone, text, or tokens. See IRS News Release I.R. 2022-143 (Security Summit warns tax pros of evolving email and cloud-based schemes to steal taxpayer data) on the IRS website for more information on the latest spear phishing schemes and the advantages of using multi-factor authentication. Know the Tell-tale Signs of Identity Theft A common concern that the IRS hears from tax preparers is that they did not immediately recognize the signs of data theft. Security Summit partners urge tax preparers to learn the signs of data theft so that they can react quickly to protect their clients and themselves. Here are critical signs that data theft may have occurred: A client’s tax return is rejected because their SSN was already used on another return IRS records show more e-File acknowledgements received than the tax preparer has filed A client has responded to an email from the tax preparer that the tax preparer did not send Slow or unexpected computer and/or network issues See IRS News Release I.R. 2022-144 (Tell-Tale signs of identity theft tax pros should watch for) on the IRS website for more information on additional warning signs that data theft might have occurred and what tax preparers should do if they become a victim of data theft. Create a Security Plan The Security Summit partners have created a new sample security plan designed to help tax professionals, especially those with smaller practices, protect their data and information. As a reminder, federal law requires all tax preparers to create and implement a data security plan. The Security Summit (a private public partnership between the IRS, states, and tax industry) has noticed that a number of tax professionals are struggling to develop a written security plan. The new sample security plan, Creating a Written Information Security Plan for Your Tax & Accounting Practice, is a 29-page document that is designed to help tax preparers of all sizes to create a written security plan. See IRS News Release I.R. 2022-147 (Security Summit releases new data security plan to help tax professionals) for more information on this new sample security plan and additional resources available to help tax preparers with securing their computer systems in their office. Protection for Remote Workers With many people working from home, the IRS and Security Summit partners urge individuals to use a virtual private network (VPN) to securely conduct business. See IRS News Release I.R. 2022-151 (Tax pros can help clients battle identity theft risk) for what individuals should consider when conducting business online. Additional Security Summit Resources See the following on the IRS website for more information on the IRS Security Summit and this summer’s Protect Your Clients; Protect Yourself – Summer 2022 awareness campaign: Security Summit page Protect Your Clients; Protect Yourself – Summer 2022 page IRS Publication 4557 – Safeguarding Taxpayer Data Data Theft Information for Tax Professionals CrossLink Professional Tax Software CrossLink is the industry’s leading professional tax software solution for high-volume tax businesses. Built based on the needs of busy tax offices that specialize in providing their taxpayer clients with fast and accurate tax returns, CrossLink has been a trusted software solution since 1989. CrossLink’s in-depth tax calculations allow you to prepare the most complicated tax returns with confidence and ease.
Detailed Breakdown of How Taxes Work
How Taxes Work The U.S. tax system is extremely complex. This article is meant to help you understand what taxes are, how taxes work, the different tax forms that exist, and how to file them. What are Taxes? Income taxes are a type of tax that the federal and most state governments impose on an individual’s or business’ income. All individuals and businesses must file an income tax return annually. The U.S. tax system imposes a progressive tax in which the tax rates increase with income. It is also a voluntary system in the sense that taxpayers report all of their earnings by filing an annual income tax return and compute their tax themselves. However, paying and filing their income tax is required by law. For individuals, there is a personal income tax that is imposed on their wages, salaries, and other types of income. Business’ such as corporations, S corporations, partnerships, and self-employed individuals are taxed on their taxable business income. For S corporations and partnerships, the net business income is passed thru to the shareholders and partners who then report it on their personal income tax return. Self-employed individuals report their business income and expenses on their personal income tax on Schedule C. Direct Taxes Direct tax is a tax paid directly to the government agency or authority that is imposing the tax. Examples of a direct tax are: Individual and Corporate income tax Capital Gains Tax Estate Tax Property taxes Indirect Taxes Indirect taxes are imposed only when a taxable transaction occurs. Examples of indirect taxes are sales tax, excise taxes, consumption taxes, or value added taxes. An indirect tax is collected by an intermediary when the taxable transaction takes place, such as purchasing an item at a retail store. The retail store will then forward the tax on to the applicable government agency when they file a return during the year. Income Types For tax purposes, the types of taxable income for individuals are: Employee compensation – Includes salaries/wages, commissions, tips, fringe benefits, and stock options Rental Income – Income received from renting real estate Net Business Income – from a sole proprietorship Investment Income – Includes interest, dividends, royalties, and capital gains and losses Unearned Income – Income not received through work or business activities Earned Income – Income received from employment, work, or through business activities Passive Income – Earnings that are received from rental property, a limited partnership, or other business activity in which the individual is not actively involved Pass-thru Income from Partnerships and S Corporations – reported to individual on a K-1 Employment Taxes Employment taxes (usually referred to as payroll taxes) are taxes that employees and employers pay based on the wages and salaries paid by employers and tips earned by the employee. The employee pays their portion of these taxes through a deduction from their wages, and the employer pays their portion directly to the IRS when they file their payroll tax returns during the year. Examples of payroll taxes are: The Federal income tax that each employee must have withheld from their wages Social Security and Medicare taxes, which the employee pays half and the employer pays half Federal Unemployment Tax, which the employer pays each year Capital Gain A capital gain is the profit that an individual has from the sale of property or an investment. For tax purposes, the sale of property or stock is reported on Schedule D and if the taxpayer realizes a gain on the sale, it is either short-term (property held less than one year) or long-term (property held for longer than one year). A short-term capital gain is taxed as ordinary income and a long-term gain is taxed at the capital gains rate of 0%, 15%, or 20% depending on the taxpayer’s taxable income. Dividend A dividend is a distribution of cash, stock, or other property to a publicly listed company to its eligible shareholders. These distributions are made out of a company’s profits as a reward to investors for purchasing stock in the company. Dividends are taxable to the individual in the year they receive it. Interest Interest is the cost an entity, such as a bank, charges for loaning money to individuals and businesses. It also is the amount that an entity, such as a bank, will pay to individuals or businesses that deposit their money at the entity. Interest income is the earnings generated from interest-yielding investments such as savings accounts, Certificate of Deposits (CDs), and other investments that pay some form of interest. Interest income is taxable to the individual in the year they receive it. How to File Taxes For federal purposes, every individual who has total taxable income over a certain threshold (more than $12,550 or $25,100 if filing Married Filing Joint for 2021) must file a federal income tax return each year. Tax Forms To file a federal income tax return, individuals need to file, at a minimum, the following tax forms: 1040 (U.S. Individual Income Tax Return) Form 1040 is the main form that an individual uses to file their annual federal income tax return. The individual enters their taxable income, claims deductions and credits, enters their tax withheld from their wages, and any other payments they have made during the year, and with this information determines whether they will receive a refund or owe additional tax. Form 1040 generally must be filed by April 15 each year, however if an individual needs more time to gather their information, the IRS grants taxpayers an automatic six-month extension until October 15 to file their federal income tax return. If the individual believes they will owe additional tax, they must pay that tax by April 15 or they will owe penalty and interest for not paying their tax on time. The Form 1040 includes the most common income deductions and credits. If the individual needs to report additional income items or claim additional deductions or credits, they may need to use the following: Schedule
How To eFile Taxes Like a Professional
Learn how to efile taxes as well as what e-filing is, how it works, and the advantages of e-filing your taxes in this detailed article.
Top 2022 IRS Dirty Dozen Tax Scams
The IRS has posted its annual Dirty Dozen list of tax scams for 2022. Continuing its 20 year legacy, the annual Dirty Dozen list is a way of alerting taxpayers and tax preparers of schemes and abusive arrangements. This year, the IRS is concentrating on abusive arrangements, identity theft scams, and bogus tax avoidance schemes that taxpayers may encounter at anytime, but especially during the peak of the filing season. Below is a listing (with a brief description) of the schemes that the IRS is highlighting this year. Identity Theft Scams The IRS continues to see identity thieves evolve their schemes and continue to use schemes they have used in past years. Below are some of the tax scams criminals are attempting to trick individuals into giving them their personal and financial information. Pandemic related tax scams Criminals are still using the COVID-19 pandemic to attempt to steal people’s money and identity with bogus e-mails, social media posts and unexpected phone calls. Examples are: Economic Impact payment and tax refund scams Unemployment fraud leading to inaccurate taxpayer 1099-Gs Fake employment offers posted to social media Fake charities Suspicious Communications Criminals continue to use communications such as bogus calls, texts, emails, and posts online to either trick, surprise, or scare someone into providing sensitive personal financial information, money, or other information. This data can be used to file false tax returns and tap into financial accounts. Email Spear Phishing Spear phishing is an email scam that attempts to steal a tax professional’s software preparation credentials and/or install malware. This allows the criminal access to the tax professional’s computer systems to steal client data and tax preparers’ identities in order to file fraudulent tax returns for refunds. See the following IRS News Releases for more information on identity theft related schemes. IR-2022-117 – IRS continues with Dirty Dozen this week, urging taxpayers to continue watching out for pandemic-related scams including theft of benefits and bogus social media posts IR-2022-121 – Dirty Dozen: Scammers use every trick in their communications arsenal to steal your identity, personal financial information, money and more IR-2022-122 – Dirty Dozen: Security Summit reiterate recent warning to tax professionals and other businesses of dangerous spear phishing attacks Abusive Transactions The IRS is focusing on the following four potentially abusive arrangements and Offer in Compromise mills. Offer in Compromise (OIC) Mills Offers in Compromise mills make outlandish claims, usually in local advertising, regarding how they can settle an individual’s tax debt for pennies on the dollar. OIC mills are a problem all year long, but these tax scams tend to be more visible right after the filing season is over and individuals are attempting to resolve their tax issues. Use of a Charitable Remainder Annuity Trust to Eliminate Taxable Gain These transactions involve the transferring of appreciated property to a charitable remainder annuity trust (CRAT). The taxpayer then improperly claims a step-up in basis to the fair market value as if the property had been sold to the trust. The CRAT then sells the property but does not recognize a gain due to claiming the step-up in basis for the property. The CRAT uses the proceeds from the sale to purchase a single premium immediate annuity and the beneficiary reports a small portion of the annuity received as income. The taxpayer treats the remaining payment as an excluded portion representing a return on investment for which no tax is due. In this tax scam situation, the taxpayer is misapplying the rules under sections 72 and 664 of the Internal Revenue Code. Maltese (or Other Foreign) Pension Arrangements Misusing Treaty A US taxpayer is attempting to avoid US tax by making contributions to certain foreign individual retirement arrangements in Malta (or possibly other foreign countries). They then improperly claim an exemption from US income tax on the earnings in, and distributions from, the foreign arrangement by asserting that it is a “pension fund” for US tax treaty purposes. Puerto Rican and Other Foreign Captive Insurance US owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican, or other foreign corporation, with cell arrangements or segregated asset plans in which the US owner has a financial interest. The US owners claim a deduction for the cost of “insurance coverage”. Monetized Installment Sales These tax scam transactions involve the inappropriate use of the installment sale rules under section 453 by a seller who, in the year of the sale of the property, effectively receives sale proceeds through purported loans. See the following IRS News Releases more information the above abusive schemes. IR-2022-113 – IRS warns taxpayers of “Dirty Dozen” tax scams for 2022. IR-2022-119 – IRS urges anyone having trouble paying their taxes to avoid anyone claiming they can settle tax debt for pennies on the dollar, known as OIC mills. Bogus Tax Avoidance Strategies The IRS is warning taxpayers to watch out for promoters peddling the following bogus tax avoidance schemes. Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets The IRS remains focused on stopping tax avoidance by individuals who hide assets in offshore accounts and in accounts holding cryptocurrency and other digital assets. High-income Individuals not Filing Tax Returns The IRS continues to focus on individuals who choose to ignore the law and not file a tax return, especially those taxpayers earning more than $100,000 a year. These individuals represent a compliance problem that continues to be a top priority for the IRS. Abusive Syndicated Conservation Easements Promoters of these transactions take a provision of the tax law allowing for conservation easements and twist it by using inflated appraisals of undeveloped land and partnership arrangements devoid of a legitimate business purpose. These arrangements do nothing more than game the tax system with grossly inflated tax deductions and generate high fees for the promoters. Abusive Micro-Captive Insurance Arrangements In abusive “micro-captive” structures, promoters, accountants, or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes
State and Local Tax (SALT) Deduction
The state and local tax (SALT) itemized deduction allows certain taxes paid to state and local governments to be itemized deductions on their federal income tax return.
State Pass-Through Entity Tax
A total of 21 states have enacted or are considering legislation that creates a pass-through entity tax as a workaround to the $10,000 cap on the state and local taxes (SALT) itemized deduction. What is Pass-Through Entity Tax? The pass-through entity tax (PTE) allows partnerships and S Corporations to elect to be taxed at the entity level for state income tax purposes. If the entity makes this election the partner or shareholder is usually allowed to: (1) Claim a credit on their state individual income tax return for the amount of their distributive share of the pass-through entity tax paid by the partnership or S Corporation, and (2) Allows the partner or shareholder to not have to report their distributive share of income on their personal state income tax return. States with a Pass-Through Entity Tax A pass-through entity tax went into effect in the following states before 2022: Alabama California Connecticut Idaho Illinois Louisiana Massachusetts Maryland Minnesota New Jersey New York Rhode Island South Carolina Wisconsin States with Pass-Through Entity Tax Starting in 2022 A pass-through entity tax goes into effect in 2022 in the following states: Arkansas Arizona Georgia North Carolina Oklahoma Oregon States with Pending Legislation The following states have pending legislation to enact a pass-through entity tax: Iowa Mississippi Ohio New Mexico Pennsylvania Utah Virginia Pass Through Entity Tax Rules by State Here are brief details as well as where to learn more about the pass-through entity tax rules for the following States that have enacted a pass-through entity tax: Alabama Partnerships and S Corporations may elect to pay a 5% tax on their Alabama taxable income. The entity makes the election by submitting Form PTE-E via My Alabama Taxes. This form may be submitted any time during the year, or on or before March 15 of the following year. Partners or shareholders are entitled to a refundable credit in an amount equal to their pro rata distributive share of the Alabama income tax paid by the entity. Applicable for Tax Years 2021 and later. See the Alabama Electing Pass-Through Entity Tax Guidance page on the Alabama Department of Revenue website for more information. Arkansas Partnerships, S Corporations, or a limited liability company with one or more members may elect to pay a 5.9% flat tax on their net Arkansas business taxable income. The election must be made on an annual basis and must be approved by business owners holding more than 50% of the voting rights in the business. An entity makes the election by completing and filing Form AR362 (Arkansas Pass-Through Entity Income Tax Election or Revocation Form). Applicable for Tax Years 2022 and later. For more information, see the Pass-Through Entity Tax: FAQs on the Arkansas Department of Finance and Administration’s website. Arizona Partnerships and S Corporations may elect to pay a 4.5% flat tax on their Arizona business taxable income. The election must be made on an annual basis. Partners or shareholders may opt-out of the election. Partners or Shareholders are allowed to claim a Credit for Entity Level Income Tax on their individual income tax return. The amount of credit is the pass-through entity tax that is attributable to a partner’s or shareholder’s share of income taxable in Arizona. Applicable for Tax Years 2022 and later. For more information, see the Senate Fact Sheet for HB 2838 on the Arizona website. California Partnerships, S Corporations, and LLCs taxed as partnerships may elect to pay a 9.3% tax on each consenting partner’s or shareholder’s pro-rata share of the entity’s income subject to tax in California. The election is made on the entity’s timely filed tax return. If entity makes the election, the individual partners or shareholders can choose not to have their income included in the calculation of pass-through entity tax. Partners or Shareholders that consent to the election are eligible to claim a nonrefundable credit for the amount of tax paid on their pro rata or distributive share and guaranteed payments included in the entity’s qualified net income. Unused credits can be carried over for up to 5 years. Applicable for Tax Years 2021 and later. For more information, see the Pass-through entity (PTE) elective tax page on the California Franchise Tax Board’s website. Colorado Partnerships, S Corporations, and LLCs taxed as partnerships or S Corporations may elect to pay a 4.55% flat tax on their Colorado business taxable income. The election must be made on an annual basis and it is binding on all of the pass-through entity’s owners. The election is made by checking a box on the entity’s applicable Colorado state income tax return. Applicable for Tax Years 2022 and later. For more information, see Colorado House Bill 21-1327 on the Colorado website. Connecticut All pass-through entities are subject to the pass-through entity tax. Tax is calculated by one of two methods. The Standard Base is the default method. An entity may elect to use the Alternative Base method. The tax rate applied to the applicable base is 6.99%. Partners may claim a PE Tax credit on their personal income tax return. This credit is a refundable credit. Applicable for Tax Years 2018 and later. For more information, see the following on the Connecticut Department of Revenue Services website: Pass-Through Entity Tax Connecticut Publication OCG-6 (Regarding the Calculation of the Pass-Through Entity Tax) Connecticut Publication OCG-7 (Regarding the Pass-Through Entity Tax Credit) Georgia Partnerships and S Corporations may elect to pay a 5.75% tax on their Georgia business income. Entity can make the election by checking a box and completing the applicable schedules for Form 600S for S Corporations or Form 700 for partnerships. Applicable for Tax Years 2022 and later. For more information, see Rule 560-7-3-.03 Election to Pay Tax at the Pass-Through Entity Level on the Georgia Department of Revenue’s website. Idaho Partnerships, S Corporations, and LLCs taxed as partnerships may elect and pay a 6.5% tax on the distributive share of their Idaho taxable income. The election is made on the entity’s timely filed return. All partners or shareholders must agree. Each resident partner or shareholder is allowed a
State and Local Tax Deduction (SALT Deduction)
The state and local tax (SALT) itemized deduction allows certain taxes paid to state and local governments to be itemized deductions on their federal income tax return.
Amended Tax Return
When a taxpayer discovers they made a mistake on their tax return, or they are provided with or find additional tax related information after they have filed their return, they can file an amended tax return to correct the errors or add the additional information.
9 States with No Income Tax for 2022
Income tax is a tax imposed by a government on income generated by individuals and businesses.
Changes to Accessing IRS E-Services
In November of 2021, the IRS began switching many of their online services applications to a new authentication platform.